ANZ Commodity Price Index

Wednesday 13 Dec 2017

The ANZ Commodity Price Index slipped 0.9% m/m in November. The index has fallen
in four out of the last five months and is now only 6% ahead of this time last year –
down from 25% y/y in June. Dairy was again the main culprit, although nine of 17
subcomponents fell and only five rose, so the softening was broad-based. The NZD
continued to fall against major trading partners, with the TWI down 2.1% m/m. This
helped offset the fall in international prices, with local returns up 1.5% m/m (now +12%
y/y).

Expanding milk supply in all parts of the globe is placing downward pressure
on dairy prices. Whole milk powder came under more pressure in November (-6.2%
m/m) as NZ production exceeded expectations and buyers were happy to take a wait
and see approach. Additionally, inventory levels in China have reportedly started to
build, with year-to-date imports running 18% y/y ahead. Skim milk powder was also
under pressure (-6.0% m/m) with improvement in European milk supply and
expectations the intervention scheme will be changed to a tendering process, which
provides no defined price floor. The pressure on SMP has been depressing prices for
other protein products too, such as casein and caseinates. In particular demand from
the US and Mexico appears to have softened for casein.

Meat prices have held up better than expected. Lamb prices fell just 0.5% m/m,
which is better than their typical seasonal fall at this time. While the European
Christmas market has been slightly more fickle, a slow start for new season supplies
and strong demand for the Chinese New Year festive season has supported prices.
Beef prices have continued to exceed expectations with tighter import supply and
robust US demand supporting manufacturing prices. Chinese demand for prime beef
during the New Year festive period has also been strong. Venison prices remain at
record highs. Very tight local supply through the traditional European chilled demand
peak, as well as continued demand growth in the US, are supporting prices.

Horticulture prices lifted 3.9% m/m. NZ products are at the shoulder end of the
season, supporting prices. For kiwifruit, lower local supply and softer European
production are both supportive. Seafood prices were flat.

Forestry prices continued their strong two year run. Wood pulp prices increased
13% m/m, up 21% since September. Strong Chinese demand, low inventories and
supply disruptions for other major suppliers combined to lift global prices. Log export
prices pushed higher (+0.9% m/m), which is typical for this time of year. Despite high
import volumes, solid offtake levels have seen Chinese inventory levels hold steady,
supporting prices.

Aluminium prices fell 1.5% m/m as forced Chinese smelter production cuts come
into effect. Uncertainty in aluminium markets is high due to concerns that Chinese
production cuts won’t be met. This is because areas not affected by the production
restrictions are increasing output and there is uncertainty over the size of cuts in
‘illegal’ capacity. The market seems to be taking it in its stride for now, but volatility will
continue to be driven by these developments.

All up, the cyclical top is in for New Zealand’s export values, with dairy prices under
more pressure. Supply considerations will continue to hold sway, but solid demand in
most markets and sectors should provide some durability. Combined with a lower NZD
this is helping buffer local exporter returns.